Lawsuit Lending

Lawsuit lending is a financial practice that provides “up-front” cash to individual plaintiffs to cover immediate living or medical expenses during litigation. These loans are typically attached to sky-high interest rates, fees, and charges – as much as 200 percent – that can leave borrowers with little to no recovery. In addition, lawsuit lending prolongs litigation and distorts the fundamental nature of the civil justice system.

In lawsuit lending, repayment is contingent on the plaintiff recovering some sort of monetary compensation, either through a settlement or verdict. In fact, the lawsuit lending industry goes to great lengths to tell the public that consumer lawsuit loans are not really loans at all, but are instead “nonrecourse financing.” This rationale is how lawsuit lenders have managed to avoid regulation in many states. Read More...

Unfortunately, lawsuit lending is far from harmless. It hurts consumers while undermining the integrity of the justice system.

The practice hurts consumers by eating into their recoveries in litigation. The New York Law Journal reported on the case of a Brooklyn man who borrowed $27,000 from a lawsuit lender for a slip-and-fall lawsuit. His case was settled five years later, but the lender demanded $100,000 – two-thirds of the total settlement and more than three times the amount of the original loan. To add insult to injury, the plaintiff’s lawyers pocketed an additional one-third of the settlement – leaving the plaintiff with just $111 out of a $150,000 settlement. In another case reported by the New York Times, a plaintiff actually lost money. After winning nearly $170,000 at trial, the plaintiff’s lender claimed it was owed $221,000 – an amount 30 percent larger than the total recovery.

Moreover, lawsuit lending distorts the civil justice process by altering a plaintiff’s decision making process. For example, a plaintiff may reject a reasonable settlement offer for the chance of obtaining a higher verdict in court because they will need to pay off a high-interest loan. This choice jeopardizes the chance of any recovery, as litigation could result in a lower than expected verdict or a judgment in favor of the defendant. It also increases costs for defendants, who are forced to endure prolonged and costlier litigation.

Finally, lawsuit lending undermines the integrity of the civil justice system. By inserting a third party into the case, lawsuit lending compromises the interests of litigants – upsetting a primary bedrock of the justice system. It also creates conflicts of interests for plaintiffs’ lawyers, who may develop referral relationships with certain lawsuit lenders and be expected to “steer” clients to those lenders.

Reforms

Lawsuit lending should be regulated like any other consumer financial product. In November 2015, the Colorado State Supreme Court unanimously decided that lawsuit lending is subject to the state's existing consumer lending law. The ruling established an important legal precedent that lawsuit lenders must play by the same rules as other lenders in the state. Several bills have also been introduced in state legislatures to do exactly that. Oklahoma became the first state to pass such legislation in 2013. In 2014 Tennessee passed a law that provides meaningful regulation to lawsuit lending, and in 2015, Arkansas followed suit. Indiana joined the community of states regulating this product under state consumer lending laws in 2016. 

Suggested Resources

Research

All Results for Lawsuit Lending

  1. In the News Today - April 4, 2014

    April 04, 2014 | News and Blog

    Courts are taking a closer look at attorney fees in merger and acquisition lawsuits that often result in disclosure-only settlements.... Read More

  2. Tennessee House to Take Up Lawsuit Lending Bill

    March 27, 2014 | News and Blog

    Lawsuit lenders in Tennessee should be regulated like any other lender in the state says Yuri Cunza.... Read More

  3. OPINION: Lawsuit lenders should be regulated as other lenders

    March 26, 2014 | News and Blog

    The Tennessee House of Representatives is expected to consider the Tennessee Litigation Financing Consumer Protection Act in the next few days, a bill that protects consumers from predatory lending practices.... Read More

  4. Illinois: Stop the Unregulated March of the Lawsuit Lenders

    February 24, 2014 | News and Blog

    The Illinois General Assembly said 'No' to the lawsuit lending industry once before. They can again protect Illinois consumers by opposing the industry's latest proposal -- and then working to provide greater oversight and reasonable regulation of the lawsuit lenders.... Read More

  5. In the News Today - February 21, 2014

    February 21, 2014 | News and Blog

    Third-party litigation financing can lead to conflicts of interests and prolong litigation, Gerald Skoning warns in the Wall Street Journal.... Read More

  6. In the News Today - February 10, 2014

    February 10, 2014 | News and Blog

    Tennessee lawmakers can protect consumers by passing lawsuit lending regulations that are pending in both houses, writes Thurbert Baker in the Tennessean.... Read More

  7. In the News Today - February 6, 2014

    February 06, 2014 | News and Blog

    A judge's recent decision should be a wake-up call for the potential for fraud in asbestos litigation, ILR's Harold Kim told NPR. ... Read More

  8. Newspaper Highlights ILR Video Amid Passage of Lawsuit Lending Bill

    January 16, 2014 | News and Blog

    On Tuesday, the Tennessee Senate passed SB 1360, a bill to regulate the predatory practice of lawsuit lending.... Read More

  9. In the News Today - December 9, 2013

    December 09, 2013 | News and Blog

    Indiana lawmakers are considering regulations for lawsuit loans.... Read More

  10. In the News Today - October 24, 2013

    October 24, 2013 | News and Blog

    A federal appeals court has rejected the Delaware Court of Chancery's confidential arbitration process for resolving business disputes, ruling that the system violates the First Amendment.... Read More